Profit Makers
The Dynamic Manager’s Handbook On
How To Run A Better Business
by Dave Donelson
Donelson SDA, Inc.
Copyright 2011 Dave Donelson
ISBN: 978-1466136335
Smashwords Edition
A note from the author
The Dynamic Manager Handbooks are for entrepreneurs, managers, and others who want to succeed in small business by learning more about management techniques, operations, and best practices. Each volume in the collection is devoted to a single topic. The material was extracted from the Dynamic Manager Guides, my series of books based on my experiences as a business journalist, consultant, and entrepreneur.
Table of Contents
Chapter 1 - Change Is In The Air Everywhere
Chapter 2 - Temptation By The Numbers
Chapter 3 - Details, Details, Details
Chapter 4 - Negotiate Your Way To Profits
Chapter 6 - Case Study: Man Against Machine
Chapter 7 - Greening Your Company
Change Is In The Air Everywhere
“Some of us fight change and some of us embrace it, but we all have to deal with it.”
Nothing is so permanent as change. The customer you deal with today will not be the same one you see tomorrow. Your employees will have a different outlook on work when they get up in the morning and your vendors will come through the door with new products, new prices, and oh, by the way, new corporate owners with new credit requirements. More of your tools will have LCD screens and many of them will talk wirelessly to your customer and to each other. You can only hope they keep talking to you. In every type of business—change happens.
Some of us fight change and some of us embrace it, but we all have to deal with it. “You have to respond to the market,” says Michael Young, owner of Street Rods by Michael in Shelbyville, Tennessee. “If you can’t adapt, you’re not going to be here in five years.”
Consider your customers. Most company owners are justifiably very proud of having a base of loyal customers. If they rely exclusively on those loyal customers to support their revenue stream, though, it won’t be long before they see their sales decline. Why? Because customers change. Consider just one simple fact: twenty percent of Americans move every year. While not every one of them moves across the country and therefore out of your market area, many do. And even those that just move across the street put a dent in their disposable income with moving expenses, etc., that cut into their budget for other things—like what you sell. Those lost sales have to be replaced by sales to new customers just to stay even.
Even the customers who do stick around change. Their tastes evolve, they learn new things, they get bored and want to do or own something different. If nothing else, they get older. The baby boomers, the generation that gave us the Rat Fink and American Graffiti, has started cashing Social Security checks. How will that change their propensity to spend money on hot tubs, designer denims, or flat screen TVs? And will the younger customers who hopefully come along to replace them be looking for the same things? Not likely. That’s one reason you see more muscle cars on the street and fewer ‘34 Fords; more Hondas and fewer Chevrolets. It’s not just a change in fashion—it’s a change in the customer.
Don’t fight it
So how do you deal with change? To start with, don’t fight it—you can’t win. Instead, open your eyes to the inevitability of change, make yourself and your company ready for it, and embrace it when it comes. The first step, if you want to keep up with changes in the marketplace, is to make a conscious effort to listen to what the customers are saying to you about themselves and what they want.
“Customers are more knowledgeable,” observes Sales Manager Tom Dickinson of AP Tuning in Lebanon, PA, a company that specializes in high-performance automotive work. Not too many years ago, hot rod magazines and mail-order catalogs defined media for that market. Today, enthusiasts can learn about the sport from an ever-growing number of media outlets—everything from the Internet to entire television networks devoted to it. Enter a term like “torque converter” into Google, and you’ll get 743,000 listings. When Dickinson’s customers see somebody on TV winning races or shows with a car like theirs, they become a more informed—and generally more demanding—customer.
“It used to be that you learned about cars by talking to the guy in the next pit stall at the track,” according to Darrick Klima, also in the automotive performance business as owner of Belleville Motorsports in Belleville, KS, where they build over 100 race cars a year. “One of the bigger things these days are race car workshops and driving schools. People are spending money to become better racers because they’re spending more money on better race cars. It puts a lot of pressure on everybody.” Klima attends schools and seminars himself so he will know what his customers are being told.
Klima also spends a lot of time getting feedback from customers. “We meet change by listening to our customers,” he says. “All I do all day is talk to people who are racing our cars.” He says he and his staff listen to the drivers’ ideas, bounce them around internally, then try them out to see if they work. If they do, the new concepts become incorporated into all their products. “We have to definitely spend more time and money trying to come up with a better mousetrap.”
Change affects everybody
Don’t forget to prepare your staff for change as well. I’ve never talked to a company owner who didn’t say that finding good people is one of the hardest jobs they have. Once you’ve found them, they’ll be a lot more valuable to you if you invest in training them to use the newest technology and encourage them to keep their eyes and ears open to new ideas in your industry. Employees that receive periodic training have a higher sense of self-worth, feel greater loyalty to their employer, and perform at a higher level, so your investment in their training will pay for itself many times over.
The market changes in other ways, such as when new competitors enter the fray. With the growth of the Internet, anybody willing to spend ten dollars a month to host a website can proclaim themselves your competitor and start selling to your market online. As Dickinson points out, “The drop-shippers online put additional pressure on shops like ours. It’s tough to tell a customer we have to charge him $500 for a part when they can buy it from some Joe Schmoe online for $400.” To respond, AP Tuning added full online shopping capability to their own website. It’s not a major factor in the business—yet—but it helps meet the changing marketplace conditions.
Young went online in 1997 and today has a website that not only sells parts, shows off customers’ cars, and gives you a wealth of information about the business, but even allows you to “build your car” online, changing various components and getting a rough quote on cost. He has one staff member dedicated full time to keeping the site up to date. “The Internet has paid for itself two hundred times over,” he says.
You don’t necessarily want to be on the bleeding edge of change, but you do have to fully commit to changing your operation when the time comes. That probably means making a financial commitment to new tools, training for your people, or even new shop facilities. The smart shop owner who recognizes that change is going to happen budgets for it, setting aside something every month in a contingency fund or establishing a line of credit to be tapped to meet changes in the market. You may not be able to specify today what you’ll need that money for tomorrow, but you can rest assured that you are going to need it for something.
Change will never stop—it will always happen. LP’s became cassettes that were replaced by CD’s that lost out to tunes downloaded to iPod’s. As of a couple of years ago, Western Union no longer sends telegrams. Monday Night Football moved to cable. Next year, who knows—maybe your customers will become your competitors. Will you be ready?
“This new frangelator system will double your shop’s profits. Just sign here.”
The salesman’s pitch is very seductive: You can make a gazillion dollars just by adding his company’s product line to your existing specialty. Maybe your shop has built a reputation for professional work, specialized installations, and custom designs. You’ve built a good business, but the exponential growth you experienced in the early years has tapered off to single digits. You make a nice profit, but wouldn’t it be even nicer to make more?
Sure it would! But is adding another specialty the best way to do it? Maybe, maybe not. The only way to decide is by getting out the old calculator (or opening a spreadsheet on your computer) and doing a little ROI analysis before you sign up for that new fictional frangelator machine and a supply of frangels, whatever they are.
It’s one of management’s age-old quandaries. Is it better to focus your business on what it does best, growing it organically and building your profit margin by ever-improving efficiencies? Or does it make more sense to diversify, to have a basket full of businesses so that if one falls off another one can take up the slack. You can certainly make strong argument for either approach.
But the basis of any discussion of changing your business mix has to be a careful, thorough analysis of the ROI, or return on investment, of all the alternatives. It’s not hard, but there are a few less-than-apparent factors you should consider.
First estimate your profit
The first step is estimating the size of the frangelator market by answering a couple of questions: How many customers in your area could use one and, of those, how many are likely to buy one?
Depending on what you’re considering, the first question can be answered with a little research into your market that fit the criteria. Let’s say you’re in the automotive aftermarket—a place for frangelators if I ever saw one. If the product is model specific, fitting only 1999 model year or later Ford Explorers, for example, you may be able to do something as simple as checking with the department of motor vehicles to find out how many of them are licensed to your market. The key thing to get, though, is a specific number; there isn’t any “a lot” key on your calculator.
The second question is a little trickier and may require pushing the frangelator salesman for some information about sales for existing dealers in similar markets. If he’s not forthcoming, ask him for some dealer names and numbers so you can check with them yourself. A few phone calls to confirm the company’s performance in terms of delivery, support, and reliability would be a good idea anyway. While you’re at it, find out how many frangelators they sold in the first year.
Now calculate the potential revenue you can bring in. If there are 1,000 potential customers in your market and you can sell ten percent of them in the first year, multiply the price of the item by 100. Subtract the product costs, labor, and other direct expenses, and you have the potential first year gross profit. Then do the same math for subsequent years, too, assuming some reasonable growth in the number of units sold for up to five years. Average the five-year gross profit and put that number aside for a minute. Some variation on this is probably the basis of the frangelator salesman’s pitch, by the way.
Then estimate your investment
But now let’s do the other part of the ROI equation. How much will you have to invest to produce this new profit? Here’s where it gets a little tricky because there are some hidden costs that are easy to overlook and, quite frankly, sometimes difficult to quantify. The investment in more shop space, equipment, necessary parts inventory, etc., is pretty straightforward, of course. But there are other, less tangible, costs associated with any new venture.
What about training? Will the company send someone to your shop to show you and your people how to install those miraculous frangels? Do they provide training off site? Or at an existing dealer? What’s it going to cost you to get that training? Even if the company doesn’t charge for it, your people don’t work for nothing, so any time they spend learning the ins and outs of the frangelator business is on your payroll. Their wages, benefits, etc., can’t be ignored (nor can yours), nor can any out-of-pocket travel expenses related to the training process.
There is another employee-related cost that is easy to overlook. Everybody’s time is money and so is yours. Unless you have some pretty special employees, they can’t be working to satisfy existing customers’ needs while they are becoming frangel experts. Count up every man hour you expect to invest in training and multiply it by the amount of revenue your employees generate per hour, and add it to the direct training cost.
Then there’s marketing. You have to let the 1,000 people who own frangelator-needy vehicles know that you can help them. If it’s a new product, you may have to spend some money explaining what it does and why they should have one. What’s it going to cost to reach that target market the number of times necessary to get the message across? Whether you choose mass media like TV, radio, or billboards, or targeted ones like direct mail or email, there are substantial costs involved in producing the message and buying the media.